One of the reasons why I’m an Apple user is because I appreciate good service. When I dropped my Macbook one evening and my hard drive stopped working, it was incredibly easy to schedule an appointment with the Genius Bar at my local Apple store. They fixed my hard drive and recovered my data within 30 minutes and away I went. Peace of mind is worth the premium, which is why I’m a fan of technology-assisted financial advisory firms with human financial advisors.
But what if you have time and know how to upgrade your RAM, swap out your hard drive, and do your own diagnostics? (I remember doing all that as a teenager.) Then going the robo-advisor route may very well be a good option because their fees are even lower. There’s just no person to guide you through life’s myriad changes.
Robo-advisors, aka algorithmic advisors deploy sophisticated investment algorithms to help invest your money in the best risk-adjusted way possible. You essentially fill out a profile about yourself and the algorithm will go to work to recommend and implement their recommendations for you.
I used to have a hard time trusting computers to do anything for me. But after spending 13 years covering some of the largest mutual funds and hedge funds in America, it’s clear that algorithmic investing, or more commonly known as quantitative investing or scientific investing have done extremely well. For example, Bridgewater Associates run by Ray Dalio is the largest hedge fund in the world with over $120 billion dollars and it’s a macro quantitative fund with tremendous performance. Famous hedge funds run by George Soros, David Tepper, and Steve A. Cohen can’t even compare.
A good quant fund or algorithmic advisor is all about having good people. At the end of the day, the investment variables are created by people and continuously tested for maximum returns. Spending time understanding people’s backgrounds and then trusting them to do the right thing is a huge part of letting other people run your money. After all, the reason why you want someone else investing your money is because your expertise lies elsewhere, and you’ve got more interesting things to do with your time.
In this article, I’d like to provide a brief primer on the three main robo-advisors that exist today: FutureAdvisor, Betterment, and Wealthfront. Because I’ve personally met Bo Lu, Founder of FutureAdvisor, I’m going to compare and contrast FutureAdvisor to the other two. They are all based here in San Francisco.